2) The use of the Certified Public Accountant title is regulated by:
A) the federal government.
B) state law through a licensing department or agency of each state.
C) the American Institute of Certified Public Accountants through the licensing departments of the tax and auditing committees.
D) the Securities and Exchange Commission.
3) Financial statement users often receive unreliable financial information from companies. Which of the following is not a common reason for this?
A) Complex exchange transactions.
B) Voluminous data.
C) Remoteness of information.
D) Each of these choices is a common reason for unreliable financial information.
4) Explain what is meant by information risk, and list the four causes of this risk.
Learning Objective 1-4
1) An audit of historical financial statements is most often performed to determine whether the: A) organization is operating efficiently and effectively.
B) entity is following specific procedures or rules set down by some higher authority.
C) management team is fulfilling its fiduciary responsibilities to shareholders.
D) none of these choices.
Learning Objective 1-5
1) In the audit of historical financial statements, what accounting criteria is most common? A) Regulatory accounting principles.
B) International financial reporting standards.
C) Generally accepted accounting principles.
D) B and C
E) All of the above.
2) Any service that requires a CPA firm to issue a report about the reliability of an assertion that is made by another party is a(n):
A) accounting and bookkeeping service.
B) attestation service.
C) assurance service.
D) tax service.
3) Three common types of attestation services are:
A) audits, reviews, and attestations regarding internal controls.
B) audits, verifications, and attestations regarding internal controls. C) reviews, verifications, and attestations regarding internal controls. D) audits, reviews, and verifications.
4) Which of the following services provides the lowest level of assurance on a financial statement? A) A review.
B) An audit.
C) Neither service provides assurance on financial statements.
D) Each service provides the same level of assurance on financial statements.
5) Which of the following is not a SysTrust Services principle as defined by the AICPA? A) Online privacy.
B) Availability.
C) Processing integrity.
D) Operational integrity.
6) The Sarbanes-Oxley Act prohibits a CPA firm that audits a public company from providing which of the following types of services to that company?
A) Reviews of quarterly financial statements.
B) Preparation of corporate tax returns.
C) Most consulting services. D) Tax services.
7) Which of the following are required to have a written report regarding the assertion of another party?
8) Attestation services on information technology include WebTrust services and SysTrust services. Which of the following statements most accurately describes SysTrust services?
A) SysTrust services provide assurance on business processes, transaction integrity and information processes.
B) SysTrust services provide assurance on system reliability in critical areas such as security and data integrity.
C) SysTrust services provide assurance on internal control over financial reporting.
D) SysTrust services provide assurance as to whether accounting personnel are following procedures prescribed by the company controller.
9) Two types of attestation services provided by CPA firms are audits and reviews. Discuss the similarities and differences between these two types of attestation services. Which type provides the least assurance?
10) What is an engagement to attest on internal control over financial reporting?
11) What are the five categories of attestation services?
12) What is a WebTrust engagement? What is a SysTrust engagement? How do they differ?
13) CPA firms are never allowed to provide bookkeeping services for clients. A) True
B) False
14) Section 404 of the Sarbanes-Oxley Act requires public companies to have an external auditor attest to their internal control over financial reporting.
A) True
B) False
15) Most public companies’ audited financial statements are available on the SEC’s EDGAR database. A) True
B) False
Learning Objective 1-6
1) One objective of an operational audit is to:
A) determine whether the financial statements fairly present the entity’s operations. B) evaluate the feasibility of attaining the entity’s operational objectives.
C) make recommendations for improving performance.
D) report on the entity’s relative success in attaining profit maximization.
2) An examination of part of an organization’s procedures and methods for the purpose of evaluating efficiency and effectiveness is what type of audit?
A) Operational audit.
B) Compliance audit.
C) Financial statement audit.
D) Production audit.
3) An audit to determine whether an entity is following specific procedures or rules set down by some higher authority is classified as a(n):
A) audit of financial statements.
B) compliance audit.
C) operational audit.
D) production audit.
4) Which one of the following is more difficult to evaluate objectively?
A) Presentation of financial statements in accordance with generally accepted accounting principles. B) Compliance with government regulations.
C) Efficiency and effectiveness of operations.
D) All three of the above are equally difficult.
5) Which of the following audits can be regarded as generally being a compliance audit? A) IRS agents’ examinations of taxpayer returns.
B) GAO auditor’s evaluation of the computer operations of governmental units.
C) An internal auditor’s review of a company’s payroll authorization procedures.
D) A CPA firm’s audit of a public company.
6) Discuss the similarities and differences between financial statement audits, operational audits, and compliance audits. Give an example of each type.
7) To do an audit, it is necessary for information to be in a verifiable form and some criteria by which the auditor can evaluate the information. Detail the information and criteria that would be used for:
(A) an independent CPA firm audits a company’s historical financial statements.
(B) an Internal Revenue Service auditor who audits that same company’s tax return.
(C) an internal auditor use when performing an operational audit to evaluate whether the company’s computerized payroll processing system is operating efficiently and effectively.
8) The primary purpose of a compliance audit is to determine whether the financial statements are prepared in compliance with generally accepted accounting principles.
A) True
B) False
9) Results of compliance audits are typically reported to someone within the organizational unit being audited rather than to a broad spectrum of outside users.
A) True
B) False
1) Match the engagement described to the (A) type of audit and (B) auditor that would perform the engagement. Each engagement will have an answer from List-A and List-B. An answer can be used once, more than once, or not at all.
2) Discuss the similarities and differences between the roles of independent auditors, GAO auditors, internal revenue agents, and internal auditors.
3) The primary role of the United States General Accounting Office is the enforcement of the federal tax laws as defined by Congress and interpreted by the courts.
A) True
B) False
1) The three requirements for becoming a CPA include all but which of the following? A) Uniform CPA examination requirement.
B) Educational requirements.
C) Character requirements.
D) Experience requirement.
2) List and discuss the three primary requirements to become a CPA.
Auditing and Assurance Services, 14e (Arens) Chapter 2 The CPA Profession
Learning Objective 2-1
1) The legal right to perform audits is granted to a CPA firm by regulation of: A) each state.
B) the Financial Accounting Standards Board (FASB).
C) the American Institute of Certified Public Accountants (AICPA).
D) the Audit Standards Board.
2) The four categories for describing the size of audit firms include: the Big Four international firms; national firms; regional and local firms; and small firms. Which of the following is not a characteristic of a small firm?
A) Most have fewer than 25 professionals.
B) They perform audits on small and not-for-profit businesses.
C) Tax services are more important to their practice than auditing.
D) They do not audit publically traded companies.
3) Sarbanes-Oxley and the Securities Exchange Commission restrict auditors from providing many consulting services to their publically traded audit clients. Which of the following is true for auditors of publically traded companies?
- They are restricted from providing consulting services to privately held companies.
- There is no restriction on providing consulting services to non-audit clients.
A) I only B) II only C) I and II
D) Neither I or II
4) Which of the following statements is true as it relates to limited liability partnerships? A) Only senior partners are liable for the partnership’s debts.
B) Partners have no liability in a limited liability partnership arrangement.
C) Partners are personally liable for the acts of those under their supervision.
D) All partners must be AICPA members.
5) List and describe the three factors that influence the organizational structure of all CPA firms. What are the most common forms of CPA firm organization?
6) List and describe the six organizational structures available to CPA firms.
7) Many small/local accounting firms do not perform audits as their primary services to their clients include accounting and tax.
A) True
B) False
8) All of the Big Four and many of the smaller CPA firms now operate as Limited Liability Partnerships. A) True
B) False
9) Sarbanes-Oxley and the Securities Exchange Commission restrict auditors from providing many consulting services to their publically traded audit clients.
A) True
B) False
10) Limited liability companies are structured and taxed like a general partnership, but their owners have limited personal liability similar to that of a general corporation.
A) True
B) False
) The organization that is responsible for providing oversight for auditors of public companies is called the ________.
A) Auditing Standards Board.
B) American Institute of Certified Public Accountants.
C) Public Oversight Board.
D) Public Company Accounting Oversight Board.
2) Members of the Public Company Accounting Oversight Board are appointed and overseen by: A) the U.S. Congress.
B) the American Institute of Certified Public Accountants.
C) the Auditing Standards Board.
D) the Securities and Exchange Commission.
3) The Public Company Accounting Oversight Board:
A) perform inspections of the quality controls at audit firms that audit public companies. B) establish auditing standards that must be followed by CPAs on all audits.
C) oversee auditors of private companies.
D) perform any of the above functions.
4) Assume the Public Company Accounting Oversight Board (PCAOB) identifies a violation during its inspection of a registered accounting firm. The PCAOB:
5) The Sarbanes-Oxley Act established the Public Company Accounting Oversight Board (PCAOB). What are the PCAOB’s primary functions? Who performed these functions prior to the PCAOB?
6) The Public Company Accounting Oversight Board (PCAOB) provides oversight to auditors of publically traded and private companies.
A) True
B) False
7) All CPA firms registered with the PCAOB are required to undergo a peer review annually. A) True
B) False
Learning Objective 2-3
1) The form that must be completed and filed with the Securities and Exchange Commission whenever a company experiences a significant event that is of interest to public investors is the:
A) Form S-1.
B) Form 8-K.
C) Form 10-K. D) Form 10-Q.
2) The form that must be filed with the Securities and Exchange Commission whenever a company plans to issue new securities to the public is the:
A) Form S-1.
B) Form 8-K.
C) Form 10-K. D) Form 10-Q.
3) The AICPA has authority to establish standards and rules in all but which of the following areas? A) Auditing standards applicable to financial statements of private companies
B) Compilation and review standards
C) Professional conduct
D) Auditing standards applicable to financial statements of private and public companies
4) Discuss the purpose of the Securities and Exchange Commission and its influence on setting generally accepted accounting principles.
5) The difference between the Securities Act of 1933 and the Securities Act of 1934 is that only the 1934 act requires audited financial statements.
A) True
B) False
6) Form 10-K must be filed with the SEC whenever a public company experiences a significant event. A) True
B) False
7) The overall purpose of the Securities and Exchange Commission is to assist in providing investors with reliable information upon which to make investment decisions.
A) True
B) False
Learning Objective 2-4
1) Statements on Standards for Accounting and Review Services are issued by the: A) Accounting and Review Services Committee.
B) Professional Ethics Executive Committee.
C) Securities and Exchange Commission.
D) Financial Accounting Standards Board.
2) Which of the following is not an essential component of quality control?
A) Policies and procedures to ensure that firm personnel are actively engaged in marketing strategies. B) Policies and procedures to ensure that the work performed by firm personnel meet applicable professional standards.
C) Policies to ensure that personnel maintain their independence in fact and in appearance.
D) Policies that ensure that monitoring activities are effectively applied.
7) An operational auditor may use “engineered standards” as evaluation criteria. A) True
B) False
6) To help them remain independent of the operations they audit, internal auditors should report directly to the controller.
A) True
B) False
5) Benchmarking is one source of evaluation criteria for completing an operational audit. A) True
B) False
4) Discuss each of the three phases of an operational audit.
3) To be effective, an internal audit department must report to:
2) When performing an operational audit, the internal audit team must first determine that: A) a financial audit has been performed by an independent auditor.
B) a financial audit has been performed by an internal auditor.
C) a review was performed by either an independent or an internal auditor.
D) specific criteria are developed to define effectiveness. Answer: D
1) Which of the following is not one of the three phases in an operational audit? A) planning
B) training and supervising employees
C) evidence accumulation and evaluation
D) reporting and follow-up
22) One disadvantage of functional auditing is the failure to evaluate interrelated functions. A) True
B) False
21) Operational audits are often categorized as functional, organizational, or special assignments. A) True
B) False
20) Program audits are primarily focused on inefficient uses of federal funds in sponsored programs. A) True
B) False
19) The two most important qualities for an internal auditor to possess are independence and competence.
A) True
B) False
18) Operational audits may be performed by internal auditors and government auditors, but not by external auditors.
A) True
B) False
17) Effectiveness is concerned with whether defined goals are achieved, whereas efficiency is concerned with whether the goals are achieved with a minimum use of resources.
A) True
B) False
16) Efficiency refers to the degree to which costs are reduced without changing effectiveness. The auditor’s opinion as to the appropriateness and sufficiency of evidence in forming an opinion on the financial statements.
A) True
B) False
15) Effectiveness refers to the degree to which costs are reduced without reducing efficiency. A) True
B) False
14) Match seven of the terms (a-o) with the descriptions/definitions provided below (1-7):
- Compliance audit
- Economy and efficiency audit
- Effectiveness
- Efficiency
- Functional audit
- Government Auditing Standards
- Government audit
- Institute of Internal Auditors
- Operational auditing
- Organizational audit
- Program audit
- Single Audit Act
- Specialassignment
- IIA Practice Standards
- Statements on Internal Auditing Standards
________ 1. The official title of the Yellow Book.
________ 2. A management request for an operational audit for a specific purpose, such as investigating the possibility of fraud in a division or making recommendations for reducing the cost of a manufactured product.
________ 3. A government audit to determine whether an entity is acquiring, protecting, and using its resources economically and efficiently and whether the entity has complied with laws and regulations concerning such matters.
________ 4. The degree to which the organization’s objectives are accomplished. ________ 5. The review of an organization for efficiency and effectiveness.
________ 6. Federal legislation that provides for a single coordinated audit to satisfy the audit requirements of all federal funding agencies.
________ 7. Statements issued by the Internal Auditing Standards Board of the IIA to provide authoritative interpretation of the IIA Practice Standards.
13) The auditing standards of the Yellow Book are consistent with the ten generally accepted auditing standards of the AICPA. There are, however, important additions/modifications in the Yellow Book. For example, the Yellow Book recognizes that materiality and risk are lower due to the nature of the government enterprise. Discuss the other additions/modifications.
12) Operational auditing is the review of an organization for efficiency and effectiveness. Discuss what is meant by the terms “effectiveness” and “efficiency.”
11) Discuss each of the three broad categories (types) of operational audits.
Answer:
10) The “Yellow Book” defines and sets standards for performance audits. Discuss below the purpose of a program audit.
9) Which of the following operational audits are best described by “deals with one or more of the activities as represented by functions within an organization”?
A) functional
B) special assignment
C) organizational
D) internal control
8) What distinguishes internal control evaluation and testing for financial and operational auditing? A) purpose of the work
B) scope of the work
C) both A and B
D) neither A nor B
7) Which of the following is not a purpose of a program audit as performed by government auditors? A) Determination of the extent to which the desired results established by the legislature are being achieved.
B) Determination of the causes of inefficiencies in sponsored programs.
C) Determination of the effectiveness of organizations, programs and activities.
D) Determination as to whether the entity has complied with laws and regulations applicable to the program.
6) Which of the following best describes an audit that emphasizes how efficiently and effectively functions interact?
A) operational
B) compliance
C) financial
D) organizational
5) Which is not a purpose of an economy and efficiency audit?
A) Whether the entity is acquiring, protecting, and using resources economically and efficiently. B) The causes of inefficiencies and uneconomical practices.
C) Whether the entity has complied with laws and regulations concerning matters of economy and efficiency.
D) Each of the above is a purpose.
4) Which of the following can affect the independence of operational auditors?
3) The two most important qualities for an operational auditor are: A) personality and appearance.
B) independence and competence.
C) competence and technical training.
D) academic background and sufficient experience.
2) Which of the following statements regarding types of operational audits is likely incorrect?
A) A functional audit has the advantage of permitting specialization by auditors.
B) An advantage of functional auditing is its ability to evaluate interrelated functions.
C) The emphasis in an organizational audit is on how efficiently and effectively functions interact. D) Special operational auditing assignments arise at the request of management.
1) Which of the following groups could not be involved in an operational audit? A) CPA firms
B) Internal auditors
C) Government auditors
D) None of the above answers are correct; that is, all of the above could be involved.
6) Operational audits are primarily geared towards improving a company’s operational efficiency and effectiveness.
A) True
B) False
5) Discuss three major differences between operational and financial auditing.
4) A typical objective of an operational audit is to determine whether an entity’s: A) internal control is adequately operating as designed.
B) financial statements present fairly the results of operations.
C) specific operating units are functioning efficiently and effectively.
D) operational information is in accordance with generally accepted government auditing standards.
3) Which of the following is not a difference between operational auditing and financial auditing? A) Both must be CPAs.
B) Operational audit reports are usually of a restricted distribution while financial audit reports are widely distributed.
C) Operational audits often cover non-financial issues while financial audits do not. D) None of the above is a difference.
2) Which of the following is not one of the major differences between financial and operational auditing? A) The financial audit is oriented to the past, but an operational audit concerns performance for the future.
B) The financial audit report has widespread distribution, but the operational audit report has limited distribution.
C) Financial audits deal with the information on the financial statements, but operational audits are concerned with the information in the ledgers.
D) Financial audits are limited to matters that directly affect the fairness of the financial statement presentation, but operational audits cover any aspect of efficiency and effectiveness.
1) Which one of the following is NOT a major difference between operational and financial auditing? A) purpose of the audit
B) distribution of the report
C) testing the effectiveness of internal controls
D) audits of non-financial areas
15) The “Red Book” specifies all auditing standards issued by the U.S. General Accounting Office. A) True
B) False
14) The formal name of the Yellow Book is Government Auditing Standards. A) True
B) False
13) Government auditing standards are included in the Yellow Book. A) True
B) False
12) For financial auditing, the audit report typically goes to many users of financial statements, whereas operational audit reports are intended primarily for management.
A) True
B) False
11) In addition to an opinion on whether the financial statements are in accordance with GAAP, identify four other reports required by the OMB Circular A-133.
0) A major challenge of operational auditing is in selecting the specific criteria for evaluation whether efficiency and effectiveness have occurred in the client’s organization. For example, in financial statement auditing the criteria for consideration is US GAAP or Other Comprehensive Basis of Accounting. There are no such “overriding” objectives in internal auditing.
Discuss below sources of specific criteria that could be used by the internal auditor in planning the engagement.
9) How do the risk and materiality thresholds change in a government audit compared to a financial statement audit of a public company?
8) Auditors involved in planning, performing, or reporting on audits under GAGAS must complete ________ hours of continuing professional education in each two-year period.
A) 20
B) 40
C) 60
D) 80
7) An audit designed to provide reasonable assurance of detecting material misstatements resulting from noncompliance with provisions of contracts or grant agreements that have a material and direct effect on the financial statements would be called a(n):
A) performance audit.
B) management audit. C) operational audit. D) compliance audit.
6) The Single Audit Act requires that an audit be conducted for recipients who receive total federal funds in any fiscal year of:
A) $1,000,000 or more.
B) $500,000 or more.
C) $300,000 or more.
D) $100,000 or more.
5) Governmental Auditing Standards recognize that because of public accountability over governmental activities the acceptable tolerable misstatement as compared to commercial businesses may be:
A) equal.
B) lower.
C) higher.
D) indeterminable.
4) The correct title of the Yellow Book is:
A) Government Auditing Standards.
B) IIA Practice Standards.
C) Statement of Responsibilities of Internal Auditing.
D) Statement of Standards on Accounting and Review Services.
3) Which of the following is most correct with regard to the comparison of the financial auditing standards of the Yellow Book with the 10 General Auditing Standards for financial audits?
A) the same as
B) quite different from
C) incompatible with
D) consistent with
2) When a state or local government agency receives federal funds, it is subject to the audit requirements of:
1) The primary source of authoritative literature for doing government audits is the: A) Purple Book.
B) Yellow Book.
C) Green Book.
D) Red Book.
23) Internal auditors should have the authority to require implementation of suggestions for improvement.
A) True
B) False
22) The Internal Auditing Standards Board issues Statements on Internal Auditing Standards. A) True
B) False
21) Professional guidelines for performing internal audits for companies are not as well-defined as for external audits.
A) True
B) False
20) Internal auditing standards are included in the Red Book. A) True
B) False
19) Integrity is one of the IIA’s ethical principles. A) True
B) False
18) The objectives of internal auditors are considerably broader than the objectives of external auditors. A) True
B) False
17) Current professional auditing standards allow external auditors to use internal auditors for direct assistance on external audits.
A) True
B) False
16) Current professional auditing standards prohibit external auditors from using internal auditors for direct assistance on external audits.
A) True
B) False
- 15) Independence is a fundamental ethical principle for internal auditors.
B) False
- 14) The Institute of Internal Auditors has established Ethical Principles for its members. List each of the principles.
13) External auditors typically consider internal auditors effective if they meet three criteria. What are these criteria?
12) What are several similarities between internal and external auditors?
11) The International Standards for the Professional Practice of Auditing list 7 performance standards. List three.
10) External financial statement auditors must obtain evidence regarding what attributes of an internal audit department if the external auditors intend to rely on the internal auditor’s work?
9) An audit conducted in accordance with the Yellow Book must include an audit report that states the audit was performed in accordance with:
A) GAAS.
B) GAGAS.
C) GASA.
D) SAS.
8) The professional organization which is responsible for providing guidance for internal auditors is the: A) APA.
B) IIA.
C) ABA.
D) AIA.
7) The international standards for the professional practice of internal auditing include which two categories of standards?
A) attribute and performance
B) competency and professional skepticism
C) performance and integrity
D) ethics and rules of conduct
6) Which of the following is most correct regarding external auditors use of internal auditors directly on the audit engagement?
A) discourage
B) prohibit
C) encourage
D) permit
5) External auditors would consider internal auditors effective if they are:
A) independent of the operating units being evaluated.
B) competent and well trained.
C) have performed relevant audit tests of the internal controls and financial statements. D) all of the above.
4) Which of the following is not a similarity between external and internal auditors? A) Both must be independent of the company.
B) Both must be competent.
C) Both follow a similar methodology in performing their audits.
D) Both consider risk and materiality deciding the extent of their tests and evaluating results.
3) Internal auditors are responsible to: A) the board of directors.
B) management.
C) both A and B.
D) neither A nor B.
2) Statements on Internal Auditing Standards are issued by the: A) AICPA.
B) SEC.
C) Internal Auditing Standards Boards.
D) Auditing Standards Boards.
1) Internal Auditors are expected to add value to the organization through improved operational effectiveness. In addition, their responsibilities include all the following except:
A) reviewing the reliability and integrity of information.
B) ensuring compliance with the company’s accounting policies.
C) verifying accounting information for external users.
D) ensuring compliance with applicable governmental regulations.
Auditing and Assurance Services, 14e (Arens)
Chapter 26 Internal and Governmental Financial Auditing and Operational Auditing
